High-Grade Ore: Not All That's Getting Higher In Mexico

by: Biz Bluetree

Mexico, the second largest silver producing country on the planet, has been home to legendary silver mines and stories of newfound riches for centuries. The high-grade mineral deposits that lie just below its mountainous and arid desert surface, and lack of government regulation and meddling, has made Mexico one of the most desired mining destinations and mining friendly jurisdictions in the world. Our article looks at several mining companies working the highest-grade silver deposits in this mineralized oasis just south of the U.S. border. We'll also take a closer look at what else is getting higher in Mexico.

Endeavour Silver (NYSE:EXK) operates three high-grade underground mines in Mexico, the Guanacevi Mine in Durango State and the Bolanitos and El Cubo Mines in Guanajuato State. Endeavour's production is expected to increase for a ninth consecutive year from 4.5 million silver ounces in 2012 to 6.0 million ounces of silver and 68,000 ounces of gold in 2013.

In keeping with its high performance track record, the company announced on October 9, 2013 that it had in fact set new production records for quarterly metals production, seeing silver rise 63% to equal 1,855,846 ounces Ag and gold production up 95% to 22,947 ounces Au, compared to Q3 2012. Total revenue was also up 31% to approximately 67.8 million USD in Q3 2013 as a result of the company's increased precious metals production while the company noted revenue was partially offset by lower metal prices.

So how high is high-grade? For Endeavour Silver, the consolidated average from all three mines is 171 grams of silver per ton of ore (171 gp/t Ag.) Not bad. Nearly 5.5 ounces of silver per ton of ore processed. Average consolidated processed tons per day ran at 4,321 (4,321 tp/d Ag). However, the highest of Endeavour's high-grade silver is found at Bolanitas, where the boasted cut was an average 265 gp/t Ag - which is over 8.5 troy ounces of silver per ton of ore.

Endeavor Silver's CEO, Bradford Cooke, is a brilliant businessman and geologist with a sixth sense for rejuvenating into profitability older mines that have seen their peak production in days gone by. Which is the case with all three vibrantly operating mines owned by Endeavour in Mexico, making the company the fastest growing primary silver miner in the world.

Mr. Cooke explains on the company's web site,

"Endeavour is now approaching its original production guidance for 2013 in just three quarters and we are on track to meet or beat our increased guidance targets for the year […]. However, the Third Quarter production benefited from the one time clean-out of the Las Torres plant so management cautions against using the Q3 production as a measure for Q4 production.

"The Las Torres plant Bradford Cooke refers to was a leased facility cleaned out and returned to its owner, Fresnillo PLC (OTCPK:FNLPF), as the lease agreement expired.

Fresnillo, by the way, is the world's largest primary silver producer and Mexico's second largest gold producer according to that company's web site. And speaking of high, Fresnillo is boasting average high-grade ore for 2013 to contain 300 grams of silver per ton (300 gp/t Ag).

On furthering Endeavour's exploration

Mr. Cooke reports,

"Our exploration team also continued to deliver during the Third Quarter, drilling into four new high-grade mineralized zones, three at Bolanitos and one at El Cubo. Exploration drilling was shut down during Q3 to reduce discretionary expenditures but with the robust Q3 production results, drilling has now resumed at El Cubo and Bolanitos."

Endeavour Silver also reports a stockpiled bullion inventory currently totaling 365,481 ounces of silver and 2,176 ounces of gold. This after selling 67.8 million USD worth of metals into the market at the compromised prices earlier noted. Stockpiling bullion, especially during times of depressed metals prices, makes good business sense; as was discussed in this previous article.

High-grade is definitely where the money is

Excellon Resources (OTCPK:EXLLF) owns the La Platosa Mine in Durango State, which according to the company's web site, is Mexico's highest-grade silver mine. Excellon announced its Q3 2013 production results on October 10th, reporting out-put of 454,573 ounces of silver at extremely high-grades averaging 975 gp/t Ag. With most of its September silver production operation processing even higher-grade ore of 1,000 gp/t Ag.

And by virtue of Excellon's significant amounts of lead and zinc by-product, La Platosa enjoys status as one of the lowest cash cost silver mines in country with a net cash cost of $7.77 per ounce Ag.

Fortuna Silver Mines (NYSE:FSM) operating the San Jose underground mine in southern Mexico reported its Q3 production, on October 15th, of 536,191 ounces of silver at its San Jose Mine at an average high-grade of 154 gp/t Ag, while the company also owns 51,000 Proven high-grade tons of ore in reserve at 246 gp/t Ag.

Summary: We've looked at four of the highest highs in Mexico's metals mines; though the purpose of this article is not to suggest a hot pick stock or blockbuster investment with one or the other. While the silver and gold they produce is what the world wants, with demand to increase in the future, the current world political and economic climate assures nothing is a slam-dunk. Fundamentals don't seem to add up today as they once did. Engage in "due diligence" in each company and consider very seriously what we'll discuss next.

What could go possibly go wrong for these miners and their investors?

In a depressed metals market such as the one we are experiencing now (in the west especially) mining companies are tempted to engage in "high-grading" their reserves. Put another way to coin a now popular phrase, "extend and pretend". This means some miners may ditch their long-term mine plan and go after the highest-grade deposits first. This practice gives them the ability to produce more silver or gold early, at lower costs, in order to realize higher short-term gains; but in bypassing the mine plan, they undermine the mine life. This practice often leads to a once high-grade mining project abandoned as a low-grade shell of its former self. Production costs inevitably rise above the cost at which operating the mine is feasible. This does not suggest that any of the companies above are doing this, but investors should be aware of this practice.

Another mining investment risk is the potential for even lower, across the board metals prices. Remember, fundamentals don't always add up in this sometime suggested artificial reality. And because of the very real possibility of lower spot prices, it is the prudent investor who accumulates enough in-hand physical metal to off set any noted consequential risk.

Note: Some of the above mentioned mining companies have projects in other jurisdictions, some in South America. But these are not the focus of this high-grade discussion.

What then is getting higher in Mexico?

Until a few months ago, Mexico was one of the rare countries left in the world that didn't charge taxes on mining production or profits. But a proposed 7.5% tax on resource companies, and as much as 8% for gold, silver and platinum miners is scaring investors and small players away.

Mexico, which ranks fifth globally in mining investment and fourth in exploration spending, currently taxes miners 30% of their revenue. That arrangement had been working fine for years with mining investment expected to hit a new record of $8 billion by the end of this year. But that was before "the bill" was proposed.

Earlier this year Mexico's President, Enrique Peña Nieto, introduced a plan to bolster Mexico's feeble tax collection that alarmed miners. The reform focuses on more income tax from higher earners, tightening corporate loopholes and widening the over all tax base.

Sound familiar?

The original bill, due for a Senate vote in coming months, started as a proposed 5% tax intended to redistribute miners' profits to the states and municipalities in which they mine but, later morphed into the government's full blown fiscal tax reform plan which increased the proposed tax to 7.5% to 8% of earnings before interest, taxes, depreciation and amortization EBITDA.

According to INEGI, the country's national statistics agency, Mexico's mining industry employs about 334,000 workers directly, with 2 million others employed indirectly, making the mining sector the country's fourth largest contributor to its economy behind automobiles, oil and electronics.

If approved, the new mining tax will be implemented as early as January 2014.

It's hard to say how these higher taxes may affect the above mentioned high-grade-miners but, suffice to say, it may become a riskier environment for investors. After all, it is the junior mining sector that represents the greater upside potential for large gains; low hanging fruit.

Conclusion: Myself, like many others who covet the low hanging fruit dynamic will not soon give up ownership of junior mining sector investments but, from here forward keep a judicial eye on "Mexican' investments. I feel with conviction that silver, particularly in the junior mining sector, is a strong value play. That said, I may employ what I feel is a lower downside risk strategy of putting some investment capital with a one-of-a-kind, junior silver miner pure play ETF, the PureFunds ISE Junior Silver Miner ETF (NYSEARCA:SILJ).

The PureFunds ETF, unlike its competitors Global X Silver Miners ETF (NYSEARCA:SIL) and iShares MSCI Global Silver Miners ETF (NYSEARCA:SLVP), focuses on small cap silver miners and explorers exclusively where the others hold many large-cap producers. PureFunds concentrates on presenting the low hanging fruit (if you will) to investors big and small. SILJ also offers a wider global diversification than the others, offering 26 silver junior entities over 5 continents. You can download a list of SILJ's 26 companies held in their fund here.

Incidentally, exposure to three of the four above mentioned high-grade miners; Endeavour, Excellon and Fortuna can be had with one investment in the PureFunds' basket.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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